Minimising the risk of disputes Insurance ACT 2015 Minimising the risk of disputes 18 May 2016 Tony Dempster, Partner, +44 207 466 2340, anthony.dempster@hsf.com Sarah Irons, Professional Support Lawyer, +44 207 466 2060, sarah.irons@hsf.com

overview Part 1: Duty of disclosure –v– new duty of fair presentation Part 2: Other provisions of the new Act Warranties Basis clauses Terms designed to reduce risk of loss Remedies for fraudulent claims Contracting out Part 3: Damages for late payments of claims – Enterprise Act 2016

Background to the process Marine Insurance Act 1906 – provisions are outdated and not aligned with modern insurance practice English and Scottish Law Commissions began consultation in 2006 – a 9 year long project Consultation papers published in July 2007, December 2011 and June 2012 Consumer Insurance (Disclosure and Representations) Act 2012 came into force on 6 April 2013 Insurance Act 2015 given Royal Assent on 12 February 2015

Scope and implementation Timetable Applies to insurance and reinsurance contracts governed by the laws of England and Wales, Scotland and Northern Ireland (wherever they are underwritten) Applies to insurance contracts entered into on or after 12 August 2016 Applies to variations made on or after 12 August 2016 to insurance contracts that were entered into at any time

Duty of disclosure –v– duty of fair presentation

FAIR presentation: INTRODUCTION Why has the law changed? The Law Commissions identified five issues with the duty of disclosure: poorly understood difficult for medium and large companies to comply “data dumping” passive underwriting sole, inflexible remedy of avoidance

Duty of disclosure: current law Duty to disclose every material circumstance which is known to the insured Concept of fair presentation/waiver Insured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him Knowledge of relevant directing will and mind Duty owed by insured and independently by broker Draconian remedy of avoidance

FAIR PRESENTATION: New law Duty of fair presentation of risk Insured must: disclose every material circumstance which the insured knows or ought to know, or failing that, give the insurers sufficient information to put a prudent insurer on notice to make further enquiries Every material representation as to a matter of: (1) fact must be substantially correct; and (2) belief must be made in good faith New duty to present information in a manner reasonably clear and accessible to a prudent insurer What if duty breached? Proportionate remedies

FAIR PRESENTATION Material circumstance  X Materiality – test unchanged A circumstance or representation which would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms  X special or unusual facts relating to the risk circumstances that diminish the risk particular concerns which led the proposer to seek insurance cover circumstances that are known / ought reasonably to be known / are presumed to be known by the insurer standard information that market participants would generally understand should be disclosed circumstances as to which the insurer waives information

FAIR PRESENTATION: insured’s knowledge Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insured’s actual knowledge Senior management “anyone who plays a significant role in the making of decisions about how the insured’s activities are to be managed or organised” includes the Board but may extend beyond insured may wish to consider agreeing definition with insurers? Disclose every material circumstance… …which the insured knows Knowledge of “senior management”/ Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insured’s ACTUAL KNOWLEDGE Individuals who are responsible for the insurance “individual [who] participates on behalf of the insured in the process of procuring the insured’s insurance” includes risk manager, or employee who assists in collection of data or negotiates terms of insurance includes broker Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insured’s DEEMED KNOWLEDGE Reasonable search: what will this mean for the insured? Who will the insured need to make enquiries of? Key importance of audit trail to demonstrate “reasonable search” How will insured gather information – email questionnaires, meetings with relevant individuals, site visits? How will insured document questions and responses? How will insured keep a record of those contacted (and chased)? Does the insured have a library of key information on locations, financial information, etc? Need to allow sufficient time to gather the data Insured should discuss with broker having a dialogue with insurers to seek agreement as to what constitutes a “reasonable search” Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insured’s DEEMED KNOWLEDGE Brokers how will they demonstrate their knowledge to their clients? Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insured’s DEEMED KNOWLEDGE Persons covered by insurance how will this work in practice? is there a definitive list of who the policy is intended to covered? Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance Not knowledge of agents acquired in different capacity …which the insured ought to know What should reasonably have been revealed by a reasonable search Includes information held by the broker Includes information held by persons covered by insurance

Fair presentation: insurer’s KNOWLEDGE Actual knowledge of the individual(s) deciding whether to take the risk, i.e. the underwriter Includes blind-eye knowledge “Ought to know” Information which an employee or agent of the insurer knows and ought reasonably to have passed on to the underwriter Relevant information held by the insurer and which is readily available to the underwriter “Presumed to know” Things which are common knowledge Things which an insurer offering insurance in the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business

FAIR presentation: PRACTICAL STEPS Underwriting presentations Insured should consider with their broker whether they need to change how they currently present information to underwriters Do Don’t Organise your underwriting presentation Provide CDs of information to insurers that isn’t organised Make it readily navigable Simply refer insurers to your website Use indexes and headings Be too brief or cryptic Respond fully to questions raised by insurers

PROPORTIONATE REMEDIES Remedies for breach of the duty of fair presentation For deliberate / reckless breaches: avoidance (no return of premium) For other types of breach: if the insurer would not have entered into the contract: avoidance (but must return premium) If the insurer would have entered into the contract but on different terms: contract may be treated as if it included those terms from the outset if the insurer would have entered into the contract but would have charged a higher premium: the amount paid on claim may be “reduced proportionately” No rules for specific markets (e.g. marine or subscription market)

PROPORTIONATE REMEDIES Remedies: some practical examples Insurer would have entered into the contract but included an exclusion Policy treated as if it included exclusion from outset May well affect claim currently under consideration Previously settled claims may be unravelled if subject to exclusion Insurer would have written the policy but with a sub-limit Policy treated as if sub-limit included from outset May affect claim currently under consideration and/or previous claims Insurer would have charged £2 million premium instead of £1 million Claims monies reduced proportionately – policyholder can only recover 50% No link needed between claim and premium

PROPORTIONATE REMEDIES Remedies: some practical issues Will insurers be more inclined to challenge claims? Insureds should check their current policy wordings to check if they are more advantageous than the Act and, if so, seek to preserve status quo Increased evidential burden on insurers to show what they would have done Will insurers need to change the way they document underwriting decisions? Broker will be in a unique position in knowing about other risks the insurer has written and on what terms/premium – but issues re confidentiality How will Court approach admission of evidence of other underwriting decisions? Risk of different insurers in subscription market arguing different remedies Reduction in claim payments How will this affect claims handling and claims control of insurers? Might the parties agree that the insured can pay the additional premium instead?

How can parties minimise disputes? Improve communication Start early Robust disclosure process Audit trails

PRACTICAL STEPS For insureds/brokers Ensure robust pre-inception disclosure procedures to comply with the duty of fair presentation Educate those in the organisation about what they will need to provide when the Act comes into force – what information? in what format? Identify (and seek to agree with insurers) whose knowledge is relevant Map out (and seek to agree with insurers) scope of reasonable search Have an auditable disclosure process Disclose information in clear and accessible manner Consider current policy terms to identify if you need to preserve status quo if insurers’ remedies under your policy are more advantageous than the Act Consider amendments to current policies before August 2016 to get the benefit of some aspects of the Act – see the Airmic endorsement

PRACTICAL STEPS For insurers Greater onus on insurers to ask questions of the insured – when provided with “sufficient information to put a prudent insurer on notice to make further enquiries for the purposes of revealing those material circumstances” Insurers will need to pay close attention to risk presentation Expertise – insurers deemed to know “things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business” Important for insurers to record underwriting decisions if they are to prove inducement, i.e. what they would have done differently had a fair presentation of the risk been made

Other provisions of the insurance act 2015

Other provisions of the insurance act 2015 Warranties Basis clauses Terms designed to reduce risk of loss Fraudulent claims Contracting out

Warranties: current law What is a warranty? A term of an insurance contract which must be complied with exactly whether or not material to the risk A warranty is a term by which an insured: undertakes to do / not do a particular thing; undertakes that some condition shall be fulfilled; or affirms or negatives the existence of a state of facts Identifying a warranty: No particular form of words required Can be created by an express statement or the construction of a term Basis clauses

BASIS CLAUSES: current law What is a basis clause? Declaration in policy/proposal form that certain representations made by an insured are warranted to be true and accurate No particular form of words The statements made “form the basis of the contract” Reference to proposal form or other statements being incorporated into the policy What is its effect? Converts pre-contract representations made by insured into warranties

Warranties/basis clauses: current law Remedies Remedy for breach: insurer discharged from liability from date of breach Even if no causal connection to a loss Breach cannot be remedied

Warranties/basis clauses: KEY CHANGES Warranties will operate as suspensive conditions Insurer has no liability during the “suspended” period: for any loss occurring, for any loss which is attributable to something happening during the “suspended” period – be aware re liability policies But not all warranties are capable of being remedied if breached Basis clauses abolished Breach of warranty Remedy of breach of warranty Termination Inception

Warranties/basis clauses: PRACTICAL steps For insureds: May look to remove warranties May wish to take advantage now of the Act’s provisions Changes to the law only benefits those insureds who know what warranties are in their policies, are alerted when there is a breach and can remedy them For insurers: Insurers may seek to recast existing warranty obligations as conditions precedent to liability Insurers may use “sweep-up” clauses to convert all of the insured’s obligations to conditions precedent to liability Will insurers consider contracting-out?

Terms designed to reduce risk of loss Current law Insurers’ remedy depends upon classification of the term Warranty: breach automatically brings insurance cover to an end Condition precedent: breach means: insurer does not come on risk (if cp is precedent to the validity of the policy or to the attachment of the risk), or insured is prevented from making a claim (if cp is precedent to the insurer's liability) Bare condition: breach will give rise to a claim in damages if insurers can show they have suffered prejudice – likely to be difficult Remedies available irrespective of cause of the loss Breach of term can be irrelevant/immaterial to the claim/loss and insurer still has a remedy

Terms designed to reduce risk of loss Key Changes Applies to any contractual term if compliance would tend to reduce the risk of loss of a particular kind or at a particular location or time Does not apply to terms which go to the risk as a whole Where such a term is breached, insurers will only have a remedy if the loss suffered is of the particular kind or at the time/place contemplated by the term Burden on the insured to show that the breach could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred Potential difficulties in practice: Determining which terms fall within the scope of this provision Will the policyholder be able to show that the breach could not have increased the risk of the loss?

fraudulent claims Current law Mismatch under current general law between common law rule and duty of good faith: common law rule provides for forfeiture of the fraudulent claim section 17 of the Marine Insurance Act 1906 provides for avoidance of the contract (from the outset) for breach of the duty of utmost good faith Key changes Insurer is not liable to pay the fraudulent claim Insurer may recover from the insured any sums paid in respect of the fraudulent claim Insurer has the option to give notice to the insured to treat the contract as having been terminated from the time of the fraudulent act Insurer remains liable for events giving rise to the insurer’s liability before the time of the fraudulent act

Contracting out No restriction on the parties’ ability to exclude the terms of the Insurance Act other than the prohibition on basis clauses Any exclusions must meet the “transparency requirements”: the insurer must take sufficient steps to draw the disadvantageous term(s) to the insured’s attention, taking into account characteristics of the insured and the circumstances of the transaction (unless actual knowledge of term when contract effected) the disadvantageous term(s) must be clear and unambiguous as to its effect Risks of different terms in layers/subscriptions in the same programme, eg. excess layers or reinsurance

DAMAGES FOR LATE PAYMENT

Damages for late payment Clause was dropped from draft Insurance Bill (now the Insurance Act) because of lack of market consensus Same clause reintroduced in Enterprise Act 2016 which comes into force on 4 May 2017 New law: it will be an implied term in every insurance contract that the insurer will pay any sums due in respect of a valid insurance claim within a reasonable time “reasonable time” should include a reasonable time to investigate and assess the claim breach of the implied term gives rise to a potential claim in damages for late payment of claims remedy is in addition to and distinct from the right to interest on payment of the sums due in legal proceedings policyholder must bring its claim for damages within one year of insurer paying all sums due in respect of the claim

SUMMARY Overall the changes re-balance the law: less favourable for insurers; better for policyholders Likely to be a period of some litigation/claims disputes as the new law is interpreted and beds in (recognised by the Law Commissions) Key message: Be Prepared!

ANY QUESTIONS?